Advantages and disadvantages of large Conglomerates


There are large conglomerates in India and these are the highly-diversified, multi-unit and multi-product conglomerates. The Tatas and the Birlas have such conglomerates. There are too many of them and Corporate India has seen the evolution of these conglomerates over decades. A few of them have not been able to survive and have sold out. The main advantages and disadvantages of these it conglomerates are sought to be discussed in this article.

Introduction

The multi-unit, multi-product conglomerates in India have been in business for a long time. In fact, the number of such large companies in India is rather substantial. There are some advantages and disadvantages of these conglomerates. The main advantages are a) Transferable skills and competencies across businesses b) The Management can develop Corporate Leaders quickly c) Spread of profits and losses over several businesses. The disadvantages of such conglomerates are a) The absence of Core Competencies b) The emergence of "demi-Gods" in remote units c) Inadequate time of Top Management

Transferable skills and competencies across businesses

This is one major advantage. The best example is ITC. The obvious Core Competence that it had was in manufacture and marketing of cigarettes. This was easily transferred to the agribusiness and to it's biscuit business as well. This is a big plus. This sort of competency building can happen only there is a very strong HR department that maps the potential of high performing managers and puts in place strong Systems where grooming of such managers takes place in a very effective manner. In the Aditya Birla group, for example, several Total Productive Maintenance(TPM) initiatives were launched in some businesses but we're reportedly taken across the board and implemented with a missionary zeal. Project experts who have substantial experience are effectively used in the various businesses of the Mukesh Ambani group. It is well known that one of the many Core Competencies of this group is project management.

The Management can develop Corporate Leaders quickly

Mr. Kumaramangalam Birla recruited Mr Sankrupt Mishra, the head of HR, who came in from Hindustan Lever. This HR professional is widely credited with developing a big number of Strategic Business Leaders who could take on big challenges that were unfolding when the restructuring took place in the group of companies. This development happened in double quick time in each of the businesses. Only Idea, the group cell phone business is making losses. Mr. Birla is keen to sell the business and it is now clear that this is going to happen soon. However, many or all of the other businesses are doing well. For example, it is now clear that Peter England is a leading brand for readymade textiles for men. When there is a strong HR movement that takes active interest in developing the Corporate Management, such positive developments in business excellence happen as a matter of routine.

Spread of profits and losses over several businesses

TCS is a big money spinner of the Tata group. Tata Motors may be having a bit of a rough time. But the good times will soon be back. In the meanwhile, TCS can even lend some of support to Tata Motors or Tata Steel, which is now facing tough times. Hence, cash crunch does not occur so much in such companies. Such strengths can easily enable such a big group handle any crisis far better than say MRF, the Tyre major, for which only Tyres are it's bread and butter. When there is a global recession, the company is badly affected.

Inspite of the aforesaid advantages, there are some disadvantages as well. Some of these can be overcome when the Management is very strong and can work towards effectiveness in double quick time. However, when the Management is somewhat weak, the conglomerate tends to suffer for lack of funds and raising money from banks and even foreign sources becomes very difficult when the chips are down.

The absence of Core Competencies

Many units of the JK group were doing so well in the pre-1991 period of protected markets and limited local and international competition. The then famous SPIC group was also another example that was formidable in those times. Both groups invested Rs210 crores each in two Penicillin units at Cuddalore in Tamil Nadu. When cheap Chinese imports made both units vulnerable, they cried for protection. The then Manmohan Singh Government at the Centre did not give in to the pressure and both the units were closed. The main reason was that both the companies were having experience only in some businesses and we're totally new to the bulk drug business. The entire lot of managers came from the Public Sector pharmaceutical units. These managers were not good project managers. The costs went up substantially and the building of competencies to even keep the units running took so much time. The failures were big lessons for both groups.

The Raghupathi Singhania group that had management control quickly concentrated on core businesses like JK Tyres, where it's core competencies were very good. Since then, the JK group was careful to not get into businesses where they did not have background and experience. This is also the same problem with the likes of the UB group. Today, after several years of mismanagement, it's owner Vijay Mallaya is now fighting legal battles from London. The same kind of problem has also affected even the Mukesh Ambani group. Jio may be a major player, but the huge debt may actually spell doom in a fiercely competitive cell phone market.

The emergence of "demi-Gods" in remote units

In several units of conglomerates where cement or sugar or steel or some other commodity is manufactured in remote locations that are often sitauted at a distance of over five hundred kilometers from the main metro city, the "demi-God" culture happens almost of a routine. The unit CEO is a professional with a proven track record in the same industry. He could even have been one who had worked his way to the Top. Yet, with his perceived or even real closeness to some owner-manager in the promoter family, the CEO starts to have total control. Even the minutest of expenses has to be sanctioned and approved by him. Every single item of cost reduced could have happened through the continuous efforts of so many people. Yet, the unit CEO corners all the credit.

In comes a big cadre of "yes-men", who sing peans of praise about the CEO every single minute. This goes on and on. Since the unit always makes profit, every small or even major mistake of the CEO is brushed under the carpet. This goes on for a long time and when things become out of control, some well informed owner-manager steps in. On most occasions, it is too late by then.

Inadequate time of Top Management

This is another issue. When the complexities of businesses increase, the Top Management can and will find it very tough. Consider the present position of one of the country's best leaders, Mr. N.Chandrasekharan, the present Chairman of Tata Son's. The group is growing very fast and some businesses are doing well. But ones like Tata Steel are not. His mandate to promote growth is now more challenging as there is a global slowdown too. This is the kind of problem that can happen to even highly distinguished leaders like him. Those that can fall apart, are even more vulnerable. Companies of the once famous Duncan Geoenka group, for example, are in deep trouble today. Such companies need a total revival in the whole scheme of Corporate Leadership.

Conclusion

Given the present state of the economy, it becomes very interesting to know the advantages and disadvantages of multi-unit, multi-product companies. The obvious advantages become really good when the core competencies are well set, like in ITC. In other cases, like even the Mukesh Ambani group, the disadvantages can remain so for a longer time, as the debt burden becomes more difficult to manage. The presence of professional managers who are ready for bigger challenges, like in the Aditya Birla group, can make the conglomerates function well.


Comments

Author: DR.N.V. Srinivasa Rao04 Feb 2020 Member Level: Platinum   Points : 4

When a company is having multiple products, as per the demand you can change your product line and product mix. That will make you get a profit overall even though there is some problem with some product sales. Very good control on the overall functioning of the group is very important for the success of such conglomerates and decentralisation of power and authority is very important for the people at the helm of the affairs in making the business a success. But all the number twos' of the group should be very sincere and loyal to the company. Otherwise, the conglomerates will die. Pennar Group of Andhra Pradesh is a good example for such companies. The Chairman of that group decentralised the power and he appointed CEOs for each unit. They grew very fast but the organisation died. So he combined all the units and made a single unit and now there is an improvement.

Author: Umesh10 Feb 2020 Member Level: Platinum   Points : 8

There are some advantages and disadvantages of being a large conglomerate but the companies which can transform their working with the current business practices and adopt the new technology and cope up with the changing requirements of the customer can survive in the new business arena and prosper. Many big companies go for acquiring small skill-based companies and achieve know-how instantly. That was the trick played by many companies for including the new innovations in their kitty. Small companies were also benefited in that as they got a good valuation in the market as many big players showed interest in grabbing them. I know some cases of startups and innovative groups who were benefited by such amalgamations.

Another advantage which the big companies can reap is through the volume of business. These companies have a distinct advantage of cutting the margins and getting a large number of customers as sales are generally fuelled up with such margin cuts. The case of reliance Jio is well known in the industry which compelled all other telecom players to slash their rates in accordance with the minimum dictated by the Jio strategy and once that gave them a good customer base they have removed those margin cuts and now charging the customer the usual tariff.

If the conglomerates are dynamically responsive to the market changes and business prospects than they get advantage from their big size and are generally benefited. Only those who have resistance to change and are not adopting the new technologies perish in the business race.



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